Douglass North
Encyclopedia
Douglass Cecil North is an American
economist
known for his work in economic history
. He is the co-recipient (with Robert William Fogel) of the 1993 Nobel Memorial Prize in Economic Sciences
. In the words of the Nobel Committee
, North and Fogel were awarded the prize "for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change."
, on November 5, 1920. He moved several times as a child due to his father's work at MetLife
, living in Cambridge, Ottawa
, Lausanne
, New York City
and Wallingford
.
North was educated at The Choate School
in Wallingford, Connecticut
. He was accepted at Harvard
at the same time that his father became the head of MetLife on the west coast, so North opted to go to University of California, Berkeley
. In 1942, he graduated with a B.A.
in General Curriculum-Humanities
. Although his grades amounted to slightly better than a "C" average
, he managed to complete a triple major in political science
, philosophy
and economics
.
A conscientious objector
in World War II
, North became a navigator
in the Merchant Marine
, traveling between San Francisco and Australia
. During this time, he read economics and picked up his hobby
of photography
. He taught navigation at the Maritime Service Officers' School in Alameda
during the last year of the war, and struggled with the decision of whether to become a photographer or an economist.
North decided to return to school at Berkeley to pursue a PhD
in economics. He finished his studies in 1952 and began work as an assistant professor at the University of Washington
. He was Professor
of Economics at the University of Washington
from 1950 - 1983. He joined the faculty of Washington University in Saint Louis in 1983 as the Henry R. Luce Professor of Law and Liberty in the Department of Economics
, and served as director of the Center for Political Economy
from 1984 to 1990. North held the position of Pitt Professor of American History and Institutions
at Cambridge University in 1981. In 1991, he became the first economic historian to win the John R. Commons
Award, which was established by the International Honors Society for Economics
in 1965.
North has served as an expert for the Copenhagen Consensus
and as an advisor to governments around the world. He is currently engaged in research (with John J. Wallis of the University of Maryland, College Park
and Barry Weingast of Stanford University
) on how countries emerge from what they call "the natural state" and into long-run economic growth. He is a trustee of the Economists for Peace and Security
and a special adviser to the non-profit organization Vipani
.
North is currently teaching at Washington University in St. Louis
and is the Bartlett Burnap Senior Fellow at the Hoover Institution
at Stanford University
.
Section 2 describes the economic development of societies as occurring in stages:
He begins with local exchange within the village. In this setting, specialization “is rudimentary and self-sufficiency characterizes most individual households”, with small-scale village trade existing within dense social networks of informal constraints that facilitate local exchange, and a relatively low transaction cost. In this close-knit network “people have an intimate understanding of each other, and the threat of violence is a continuous force for preserving order…”
With growth the market extends beyond the village into larger, interconnected regions. As the participants of a transaction become more socially distant the terms of exchange must be made more explicit. This increase in transaction costs necessitates institutions that reduce the risks of being cheated, either by raising "the benefits of cooperative solutions or the costs of defection."
As long-distance trade becomes more feasible, generally through caravans or lengthy ship voyages, individuals and groups experience occupational and geographic specialization. Society also experiences a rise of formal trading centers (temporary gathering places, towns or cities). From the development of long-distance trade arise two transactional cost problems:
Agency: the transfer of one’s goods or services outside the control of local rule leaves the rules of exchange undefined, the risk of unfair trade high, and the contracts within society unenforced. For this reason merchants often would send their kin or a sedentary merchant with the product to ensure its safe arrival, and the fulfillment of agreed terms of exchange by the receiving party.
Contract: covered briefly in “agency” above, problems with negotiation of contracts and enforcement of contract stipulation. Historically this problem was met with either armed forces protecting ships or caravans, or use of tolls by local coercive groups. However, in modern societies, institutions acting cooperatively in the interest of free market trade provide protection for goods and enforcement of contracts. Negotiation and enforcement in alien parts of the world require the development of a standardized system of weights and measures.
As development continues, the rise of capital markets (protection of property rights), creates social capital and enables citizens to gain wealth. Technology plays an instrumental role in the continued development of manufacturing sectors, and acts to lower transaction costs in several ways. The most substantial benefits are generally the result of transportation improvements.
Eventually, society becomes overwhelmingly urban. This final stage of development specialization requires increasing percentages of the resources of the society to be active in the market so that the transaction sector becomes a large share of gross national product. Highly specialized forms of transaction organizations emerge at this stage. Globalized specialization and division of labor demand institutions to ensure property rights even when trading in neighboring countries enabling capital markets to develop “with credible commitment on the part of the players.”
3 primitive types of exchange:
Tribal Society- “relies on a dense social network.” Colson (1974, p. 59)
Bazaars- “high measurement costs; continuous effort at clientization; intensive bargaining at every margin.”
Long-distance caravan trade- illustrates the informal constraints that made trade possible in a world where protection was essential and no organized state existed.
All three methods above are found to be much less likely to evolve.
North’s paper concludes with a few intriguing questions which his paper has aimed to address:
What is it about informal constraints that give them such a pervasive influence upon the long-run character of economies?
What is the relationship between formal and informal constraints?
How does an economy develop the informal constraints that make individuals constrain their behavior so that they make political and judicial systems effective forces for third party enforcement?
and Oliver Williamson, he helped found the International Society for the New Institutional Economics
which held its first meeting in St. Louis in 1997. His current research includes property rights, transaction cost
s, and economic organization in history as well as economic development in developing countries.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
known for his work in economic history
Economic history
Economic history is the study of economies or economic phenomena in the past. Analysis in economic history is undertaken using a combination of historical methods, statistical methods and by applying economic theory to historical situations and institutions...
. He is the co-recipient (with Robert William Fogel) of the 1993 Nobel Memorial Prize in Economic Sciences
Nobel Memorial Prize in Economic Sciences
The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics, but officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel , is an award for outstanding contributions to the field of economics, generally regarded as one of the...
. In the words of the Nobel Committee
Nobel Committee
A Nobel Committee is the working body responsible for the most of the work involved in selecting Nobel Prize laureates. There are five Nobel Committees, one for each Nobel Prize....
, North and Fogel were awarded the prize "for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change."
Biography
Douglass North was born in Cambridge, MassachusettsCambridge, Massachusetts
Cambridge is a city in Middlesex County, Massachusetts, United States, in the Greater Boston area. It was named in honor of the University of Cambridge in England, an important center of the Puritan theology embraced by the town's founders. Cambridge is home to two of the world's most prominent...
, on November 5, 1920. He moved several times as a child due to his father's work at MetLife
Metropolitan Life Insurance Company
MetLife, Inc. is the holding corporation for the Metropolitan Life Insurance Company, or MetLife, for short, and its affiliates. MetLife is among the largest global providers of insurance, annuities, and employee benefit programs, with 90 million customers in over 60 countries...
, living in Cambridge, Ottawa
Ottawa
Ottawa is the capital of Canada, the second largest city in the Province of Ontario, and the fourth largest city in the country. The city is located on the south bank of the Ottawa River in the eastern portion of Southern Ontario...
, Lausanne
Lausanne
Lausanne is a city in Romandy, the French-speaking part of Switzerland, and is the capital of the canton of Vaud. The seat of the district of Lausanne, the city is situated on the shores of Lake Geneva . It faces the French town of Évian-les-Bains, with the Jura mountains to its north-west...
, New York City
New York City
New York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...
and Wallingford
Wallingford, Connecticut
Wallingford is a town in New Haven County, Connecticut, United States. The population was 43,026 at the 2000 census.- History :Wallingford was established on October 10, 1667, when the Connecticut General Assembly authorized the "making of a village on the east river" to 38 planters and freemen...
.
North was educated at The Choate School
Choate Rosemary Hall
Choate Rosemary Hall is a private, college-preparatory, coeducational boarding school located in Wallingford, Connecticut...
in Wallingford, Connecticut
Wallingford, Connecticut
Wallingford is a town in New Haven County, Connecticut, United States. The population was 43,026 at the 2000 census.- History :Wallingford was established on October 10, 1667, when the Connecticut General Assembly authorized the "making of a village on the east river" to 38 planters and freemen...
. He was accepted at Harvard
Harvard University
Harvard University is a private Ivy League university located in Cambridge, Massachusetts, United States, established in 1636 by the Massachusetts legislature. Harvard is the oldest institution of higher learning in the United States and the first corporation chartered in the country...
at the same time that his father became the head of MetLife on the west coast, so North opted to go to University of California, Berkeley
University of California, Berkeley
The University of California, Berkeley , is a teaching and research university established in 1868 and located in Berkeley, California, USA...
. In 1942, he graduated with a B.A.
Bachelor of Arts
A Bachelor of Arts , from the Latin artium baccalaureus, is a bachelor's degree awarded for an undergraduate course or program in either the liberal arts, the sciences, or both...
in General Curriculum-Humanities
Humanities
The humanities are academic disciplines that study the human condition, using methods that are primarily analytical, critical, or speculative, as distinguished from the mainly empirical approaches of the natural sciences....
. Although his grades amounted to slightly better than a "C" average
Academic grading in North America
Academic grading in North America varies from country to country and even within countries.-United States:The most commonly used index in the U.S. educational system uses five letter grades. Historically, the grades were A, B, C, D, and F—A being the highest and F, denoting failure, the lowest...
, he managed to complete a triple major in political science
Political science
Political Science is a social science discipline concerned with the study of the state, government and politics. Aristotle defined it as the study of the state. It deals extensively with the theory and practice of politics, and the analysis of political systems and political behavior...
, philosophy
Philosophy
Philosophy is the study of general and fundamental problems, such as those connected with existence, knowledge, values, reason, mind, and language. Philosophy is distinguished from other ways of addressing such problems by its critical, generally systematic approach and its reliance on rational...
and economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
.
A conscientious objector
Conscientious objector
A conscientious objector is an "individual who has claimed the right to refuse to perform military service" on the grounds of freedom of thought, conscience, and/or religion....
in World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, North became a navigator
Navigator
A navigator is the person on board a ship or aircraft responsible for its navigation. The navigator's primary responsibility is to be aware of ship or aircraft position at all times. Responsibilities include planning the journey, advising the Captain or aircraft Commander of estimated timing to...
in the Merchant Marine
United States Merchant Marine
The United States Merchant Marine refers to the fleet of U.S. civilian-owned merchant vessels, operated by either the government or the private sector, that engage in commerce or transportation of goods and services in and out of the navigable waters of the United States. The Merchant Marine is...
, traveling between San Francisco and Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
. During this time, he read economics and picked up his hobby
Hobby
A hobby is a regular activity or interest that is undertaken for pleasure, typically done during one's leisure time.- Etymology :A hobby horse is a wooden or wickerwork toy made to be ridden just like a real horse...
of photography
Photography
Photography is the art, science and practice of creating durable images by recording light or other electromagnetic radiation, either electronically by means of an image sensor or chemically by means of a light-sensitive material such as photographic film...
. He taught navigation at the Maritime Service Officers' School in Alameda
Alameda, California
Alameda is a city in Alameda County, California, United States. It is located on Alameda Island and Bay Farm Island, and is adjacent to Oakland in the San Francisco Bay. The Bay Farm Island portion of the city is adjacent to the Oakland International Airport. At the 2010 census, the city had a...
during the last year of the war, and struggled with the decision of whether to become a photographer or an economist.
North decided to return to school at Berkeley to pursue a PhD
PHD
PHD may refer to:*Ph.D., a doctorate of philosophy*Ph.D. , a 1980s British group*PHD finger, a protein sequence*PHD Mountain Software, an outdoor clothing and equipment company*PhD Docbook renderer, an XML renderer...
in economics. He finished his studies in 1952 and began work as an assistant professor at the University of Washington
University of Washington
University of Washington is a public research university, founded in 1861 in Seattle, Washington, United States. The UW is the largest university in the Northwest and the oldest public university on the West Coast. The university has three campuses, with its largest campus in the University...
. He was Professor
Professor
A professor is a scholarly teacher; the precise meaning of the term varies by country. Literally, professor derives from Latin as a "person who professes" being usually an expert in arts or sciences; a teacher of high rank...
of Economics at the University of Washington
University of Washington
University of Washington is a public research university, founded in 1861 in Seattle, Washington, United States. The UW is the largest university in the Northwest and the oldest public university on the West Coast. The university has three campuses, with its largest campus in the University...
from 1950 - 1983. He joined the faculty of Washington University in Saint Louis in 1983 as the Henry R. Luce Professor of Law and Liberty in the Department of Economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, and served as director of the Center for Political Economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
from 1984 to 1990. North held the position of Pitt Professor of American History and Institutions
Pitt Professor of American History and Institutions
The Pitt Professorship of American History and Institutions was established on 5 February 1944 from a sum of £44,000 received from the Syndics of the Cambridge University Press in 1943 and augmented by a further £5,000 in 1946...
at Cambridge University in 1981. In 1991, he became the first economic historian to win the John R. Commons
John R. Commons
John Rogers Commons was an American institutional economist and labor historian at the University of Wisconsin–Madison.-Biography:Born in Hollansburg, Ohio, John R. Commons had a religious upbringing which led him to be an advocate for social justice early in life...
Award, which was established by the International Honors Society for Economics
Omicron Delta Epsilon
Omicron Delta Epsilon is an international honor society in the field of economics. Resulting from the merger of Omicron Delta Gamma and Omicron Chi Epsilon, ODE was founded in 1963 . Its board of trustees includes well-known economists such as Robert Lucas, Kenneth Arrow, and Robert Solow...
in 1965.
North has served as an expert for the Copenhagen Consensus
Copenhagen Consensus
Copenhagen Consensus is a project that seeks to establish priorities for advancing global welfare using methodologies based on the theory of welfare economics. It was conceived and organized by Bjørn Lomborg, the author of The Skeptical Environmentalist and the then director of the Danish...
and as an advisor to governments around the world. He is currently engaged in research (with John J. Wallis of the University of Maryland, College Park
University of Maryland, College Park
The University of Maryland, College Park is a top-ranked public research university located in the city of College Park in Prince George's County, Maryland, just outside Washington, D.C...
and Barry Weingast of Stanford University
Stanford University
The Leland Stanford Junior University, commonly referred to as Stanford University or Stanford, is a private research university on an campus located near Palo Alto, California. It is situated in the northwestern Santa Clara Valley on the San Francisco Peninsula, approximately northwest of San...
) on how countries emerge from what they call "the natural state" and into long-run economic growth. He is a trustee of the Economists for Peace and Security
Economists for Peace and Security
Economists for Peace and Security is a United Nations-registered, New York-based NGO which links economists interested in peace and security issues. Inspired by International Physicians for the Prevention of Nuclear War, it was founded in 1989 as Economists Against the Arms Race , before becoming...
and a special adviser to the non-profit organization Vipani
Vipani
Vipani is a non-profit nongovernmental organization aimed at reducing poverty among the rural poor. Vipani was founded by Dr. Thomas George as a fellow of the Stanford University Reuters Digital Vision and Rainer Arnhold Fellowships...
.
North is currently teaching at Washington University in St. Louis
Washington University in St. Louis
Washington University in St. Louis is a private research university located in suburban St. Louis, Missouri. Founded in 1853, and named for George Washington, the university has students and faculty from all fifty U.S. states and more than 110 nations...
and is the Bartlett Burnap Senior Fellow at the Hoover Institution
Hoover Institution
The Hoover Institution on War, Revolution and Peace is a public policy think tank and library founded in 1919 by then future U.S. president, Herbert Hoover, an early alumnus of Stanford....
at Stanford University
Stanford University
The Leland Stanford Junior University, commonly referred to as Stanford University or Stanford, is a private research university on an campus located near Palo Alto, California. It is situated in the northwestern Santa Clara Valley on the San Francisco Peninsula, approximately northwest of San...
.
Institutions (1991)
Douglass North’s 1991 paper summarizes much of his earlier work relating to economic and institutional change. In this paper, North defines institutions as “humanly devised constraints that structure political, economic and social interactions.” Constraints, as North describes, are devised as formal rules (constitutions, laws, property rights) and informal restraints (sanctions, taboos, customs, traditions, code of conduct), both contributing to the perpetuation of order and safety within a market or society. The degree to which they are effective is subject to varying circumstances, such as a government’s limited coercive force, a lack of organized state, or the presence of strong religious precept.Section 2 describes the economic development of societies as occurring in stages:
He begins with local exchange within the village. In this setting, specialization “is rudimentary and self-sufficiency characterizes most individual households”, with small-scale village trade existing within dense social networks of informal constraints that facilitate local exchange, and a relatively low transaction cost. In this close-knit network “people have an intimate understanding of each other, and the threat of violence is a continuous force for preserving order…”
With growth the market extends beyond the village into larger, interconnected regions. As the participants of a transaction become more socially distant the terms of exchange must be made more explicit. This increase in transaction costs necessitates institutions that reduce the risks of being cheated, either by raising "the benefits of cooperative solutions or the costs of defection."
As long-distance trade becomes more feasible, generally through caravans or lengthy ship voyages, individuals and groups experience occupational and geographic specialization. Society also experiences a rise of formal trading centers (temporary gathering places, towns or cities). From the development of long-distance trade arise two transactional cost problems:
Agency: the transfer of one’s goods or services outside the control of local rule leaves the rules of exchange undefined, the risk of unfair trade high, and the contracts within society unenforced. For this reason merchants often would send their kin or a sedentary merchant with the product to ensure its safe arrival, and the fulfillment of agreed terms of exchange by the receiving party.
Contract: covered briefly in “agency” above, problems with negotiation of contracts and enforcement of contract stipulation. Historically this problem was met with either armed forces protecting ships or caravans, or use of tolls by local coercive groups. However, in modern societies, institutions acting cooperatively in the interest of free market trade provide protection for goods and enforcement of contracts. Negotiation and enforcement in alien parts of the world require the development of a standardized system of weights and measures.
As development continues, the rise of capital markets (protection of property rights), creates social capital and enables citizens to gain wealth. Technology plays an instrumental role in the continued development of manufacturing sectors, and acts to lower transaction costs in several ways. The most substantial benefits are generally the result of transportation improvements.
Eventually, society becomes overwhelmingly urban. This final stage of development specialization requires increasing percentages of the resources of the society to be active in the market so that the transaction sector becomes a large share of gross national product. Highly specialized forms of transaction organizations emerge at this stage. Globalized specialization and division of labor demand institutions to ensure property rights even when trading in neighboring countries enabling capital markets to develop “with credible commitment on the part of the players.”
3 primitive types of exchange:
Tribal Society- “relies on a dense social network.” Colson (1974, p. 59)
Bazaars- “high measurement costs; continuous effort at clientization; intensive bargaining at every margin.”
Long-distance caravan trade- illustrates the informal constraints that made trade possible in a world where protection was essential and no organized state existed.
All three methods above are found to be much less likely to evolve.
North’s paper concludes with a few intriguing questions which his paper has aimed to address:
What is it about informal constraints that give them such a pervasive influence upon the long-run character of economies?
What is the relationship between formal and informal constraints?
How does an economy develop the informal constraints that make individuals constrain their behavior so that they make political and judicial systems effective forces for third party enforcement?
Current work
Along with Ronald CoaseRonald Coase
Ronald Harry Coase is a British-born, American-based economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took...
and Oliver Williamson, he helped found the International Society for the New Institutional Economics
New institutional economics
New institutional economics is an economic perspective that attempts to extend economics by focusing on the social and legal norms and rules that underlie economic activity.-Overview:...
which held its first meeting in St. Louis in 1997. His current research includes property rights, transaction cost
Transaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
s, and economic organization in history as well as economic development in developing countries.
Major publications
- Location Theory and Regional Economic Growth, Journal of Political Economy 63(3):243-258, 1955.
- The Economic Growth of the United States, 1790–1860, Prentice Hall, 1961.
- "The State of Economic History," American Economic Review, 55(1/2), p p. 86-91, 1965.
- Institutional Change and American Economic Growth, Cambridge University Press, 1971 (with Lance Davis).
- The Rise of the Western World: A New Economic History, 1973 (with Robert Thomas).
- Growth and Welfare in the American Past, Prentice-Hall, 1974.
- Structure and Change in Economic History, Norton, 1981.
- Institutions and economic growth: An historical introduction, Elsevier, 1989
- Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England, Cambridge University Press, 1989
- Institutions, Institutional Change and Economic Performance, Cambridge University Press, 1990.
- Institutions, 1991, The Journal of Economic Perspectives, 5(1), pp. 97–112
- "Economic Performance through Time," American Economic Review, 1994, 84(3), p p. 359-368. Also published as Nobel Prize Lecture.
- Empirical Studies in Institutional Change, Cambridge University Press, 1996 (edited with Lee Alston & Thrainn Eggertsson).
- Understanding the Process of Economic Change, Princeton University Press, 2005.
- Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History, Cambridge University Press, 2009 (with John Joseph Wallis and Barry R. Weingast).